Branch Rationalization And Digital Scaling Will Control Expenses And Improve Efficiency

Key Takeaways

• Retail Banking capital reallocation and product diversification aim to boost revenue through a more profitable business mix and increased fee income.
  
• Digital investments and cost efficiency plans target improved operational efficiency, reducing costs, and enhancing net margins despite inflationary pressures.
  
• ING faces challenges from geopolitical risks, rising costs, macroeconomic uncertainties, decreasing net interest margins, and regulatory changes impacting capital efficiency and earnings optimization.

Catalysts

Provides various banking products and services in the Netherlands, Belgium, Germany, rest of Europe, and internationally.

• ING Groep's strategic increase in Retail Banking capital allocation to 55% by 2027 should enhance capital efficiency, supporting revenue growth through a more focused and profitable business mix.
  
• The expansion and diversification of product offerings for different customer segments, including Business Banking clients in Germany and Private Banking, are expected to drive fee income, boosting revenue and potentially improving net margins.
  
• Continued investments in digital infrastructure and AI, such as the digitalization of core systems and the use of personalized marketing, are anticipated to improve operational efficiency, which may enhance net margins by reducing costs over time.
  
• ING's success in deposit growth through promotional campaigns and the focused development of sustainable finance products could lead to higher net interest income by expanding the deposit base and customer engagement.
  
• Planned cost efficiencies, including branch network rationalization and scaling of digital operations, are likely to mitigate inflationary pressures and control expense growth, improving net margins and supporting earnings.

ING Groep Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ING Groep's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.6% today to 26.9% in 3 years time.
• Analysts expect earnings to reach €6.6 billion (and earnings per share of €2.5) by about March 2028, up from €5.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €7.6 billion in earnings, and the most bearish expecting €5.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, down from 10.8x today. This future PE is lower than the current PE for the GB Banks industry at 9.0x.
• Analysts expect the number of shares outstanding to decline by 6.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.03%, as per the Simply Wall St company report.

ING Groep Future Earnings Per Share Growth

Risks

• The geopolitical risk associated with the sale of ING's onshore business in Russia highlights potential market instability and could negatively affect the company's future net margins and earnings, given the estimated €700 million impact on their P&L.
  
• A high inflationary environment and collective labor agreements contribute to rising costs, as indicated by a 4.8% increase in total expenses in 2024, which might squeeze net margins if revenue growth does not keep pace.
  
• The potential for slower-than-expected economic growth or macroeconomic uncertainties could impact consumer and business lending, affecting ING's revenue targets from loan growth and net interest income.
  
• The persistence of decreasing net interest margins due to lower replicating income, despite efforts to offset this through deposit rate adjustments, could hinder ING's capacity to maintain stable or growing net interest income.
  
• Regulatory and operational changes impacting reserve requirements and risk-weighted assets could suppress capital efficiency, limiting ING's ability to optimize earnings through strategic asset allocations in Retail and Wholesale Banking.

Valuation

• The analysts have a consensus price target of €18.893 for ING Groep based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €22.0, and the most bearish reporting a price target of just €16.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €24.4 billion, earnings will come to €6.6 billion, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 6.0%.
• Given the current share price of €18.8, the analyst price target of €18.89 is 0.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.